Idle Cash

Published on :

21 Aug, 2024

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Idle Cash is a term that refers to cash that does not reap interest benefits or increase the value of a business. It does not grow, and it is unprofitable. The cash lying around earns attractive interest when used for investments and asset purchases.

There are many causes of idle cash, some of which are essential to managing your personal finances or operating a company. Businesses and individuals can avoid their assets depreciating or losing value to opportunity costs by having a strategy for excess cash. It is essential to actively manage this cash to prevent its value from decreasing over time when it is not invested.

Idle Cash Meaning

Idle cash is a term that refers to cash that does not reap interest benefits or increase the value of a business. It does not grow, and is unprofitable.
It puts individuals further away from achieving their financial goals and delays investing with idle funds, which results in missing out on compound interest benefits.
Idle funds have certain positive aspects; there is little to no risk of losing money. They are highly liquid and, hence, are available for access when needed. If the money is not kept in a bank, no fees or charges will be paid.

Idle Cash Explained

Idle cash or funds are the money not being invested or generating interest. It needs to be utilized to earn interest and increase in value in any manner. Governments and businesses can hold unused savings that don't generate interest. They may do so if they intend to use the funds for a particular objective, like paying for government contracts or an expansion project. Similarly, individuals may keep it for a rainy day. Irrespective of the involved party or reason, money cannot keep up with the rate of inflation when unutilized funds are sitting around, not generating interest.

One thing to take into account is inflation. When you don't invest cash, it loses value over time, resulting in potential drops in returns. Here, the compounding effect is not possible and cannot be advantageous. Another important thing to think about is the opportunity that comes with investing your spare cash since that money isn't earning anything. A company or investor forfeits high interest rates in favor of a secure option when they apply for idle funds for a specific purpose.

Idle funds have particular positive aspects. They are highly liquid and, hence, are available to access when needed. No fees or charges must be paid if the money is not kept in a bank. There is little to no risk of losing money when they are sitting idle. While considering the negative aspects, when the cash sits idle, it is not earning interest or helping to grow wealth. Hence, it puts individuals further away from achieving their financial goals and delays investing with idle funds, which results in missing out on compound interest benefits for individuals, agencies, or businesses. The purchasing power of the funds reduces as inflation rises over time.

Examples

Let us consider the following instances to understand the concept even better:

Example #1

Daisy invests an initial amount of $1000 and, from there on, contributes $100 monthly for ten years. The interest rate on it is 7.5% and gets compounded annually. In 10 years, she would receive $19,037 in cash for her investments. The initial $1000 investment with the power of compounding has reached 19 times its worth. She could not have received the sum if she had chosen to keep it as idle cash.

Example #2

eToro, the social investment network, introduced a 4.9% interest rate for idle cash held in users' options accounts. To qualify, users need at least $5,000 in idle cash, but those with less can pay a fee to access the interest rate. This move suggests eToro's strategy to retain investors' funds amidst market shifts. The offering provides additional diversification options for investors, complementing eToro's existing offerings in crypto, stocks, Exchange Traded Funds (ETFs), and options trading. Despite the conventional wisdom against holding cash, the high interest rate and low risk may appeal to investors seeking alternative investment options.

How To Invest It?

Below are some of the ways to invest in idle cash:

#1 - Buying assets

The idle funds can be invested in assets by buying properties. The properties then generate cash through rent. One can later invest the amount in other assets, such as financial instruments.

#2 - Savings accounts or checking accounts

Checking accounts are highly liquid. Even if the interest these accounts provide is significantly lower than other options, they are still better than 0% interest. Savings accounts also include many free transactions and low transaction fees. There are also high-interest savings accounts that can be opted for. Hence, good choices.

#3 - Term deposits, CDs, stocks, and bonds

Term deposits help deposit funds for a period. Long periods have high interest. CDs, or certificates of deposit, are similar choices for a short period; stocks and bonds, on the other hand, come with higher risk and liquidity than deposits.

#4 - Growth opportunities

Purchasing equipment, new facilities, or other fixed assets can boost production capacity. This may be the goal of a business with idle funds. A company may engage in extra warehouse space or prepay costs like rent and insurance. It can also invest in growth opportunities, such as acquiring land for business expansion. This often turns out to be profitable.

Frequently Asked Questions (FAQs)

What does idle cash do?

It does nothing; it sits idly, hence the name. However, their main purpose is to be a highly liquid source of funds in cases of emergency and extreme necessities. It, therefore, provides a sense of security.

How do you make money on idle cash?

There are many options to choose from when investing money. Investments help in idle cash management and making money. Stocks, bonds, options, cryptocurrencies, debt funds, buying properties, and precious metals are available. Other people can also borrow them as informal loans.

How much idle cash should I have?

It depends on the goal of the individual and business. Individuals should ideally save enough money, approximately NUM0 months' worth, for a rainy day. However, the amount might increase if the goal is to buy a car or a house.